Category Archives: IRS Problems

EPISODE 3: Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published December 26, 2022

Overview:  

Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, contract litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Alexis Brewer, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports.” You can listen to this podcast by clicking here:

If you enjoy this podcast, make sure to stay tuned for more episodes from the taxation, litigation, and immigration Law Firm of Coleman Jackson, P.C. Be sure to subscribe. Visit the taxation, litigation and immigration law firm of Coleman Jackson, P.C. online at www.cjacksonlaw.com.

 

TRANSCRIPT:

ATTORNEY: Coleman Jackson

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

 

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, contract litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Alexis Brewer – Tax Legal Assistant, Leiliane Godeiro – Litigation Legal Assistant, and Johanna Powell – Tax Legal Assistant.

On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Alexis Brewer, will be interviewing me on the important topic of: Starting Your First Business in Texas. This is a series of podcasts, and today’s episode will focus on: “State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports”

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Hi everyone, my name is Alexis Brewer and I am a Tax Legal Assistant at the tax, contract litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this hot tax topic: “Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports.”

Let’s jump right in,

Question 1: Attorney could you give us a quick picture of the type of taxes imposed in state of Texas?

 

Attorney Answer – Question 1:

Hello Alexis.

First and foremost, everyone needs to understand that the State of Texas imposes a series of taxes on individuals and businesses, but there are no income taxes in Texas.  Also, folks, individuals and businesses need to understand that property taxes are levied by local governments, such as, city, county, school districts and etc. throughout the State of Texas.  The law of local property taxes is fairly straight forward and our law firm does not practice this area of law.

  1. So, let me name several of the significant taxes imposed on individuals and businesses. Texas imposed the following taxes, among others:
  2. Limited Sales, Use and Excise Taxes are imposed on individuals and businesses;
  3. Texas Franchise Taxes are imposed on certain types of businesses;
  4. Estate and Generation-Skipping Taxes are imposed on estates;
  5. Unemployment Compensation Taxes are imposed on employers in Texas with employees;
  6. Alcoholic Beverages Taxes are imposed on establishments with such licenses to sell or distribute alcoholic products;
  7. Insurance taxes;
  8. Hotel taxes are imposed on guess of hotels, motels and similar establishments;
  9. Motor fuel taxes

This is just a list of eight types of taxes imposed by the State of Texas which generates the most revenue for the state.  There are a number of other types of taxes that Texas imposes on individuals and businesses operating within the State of Texas.  Anyone wishing to discuss these taxes can contact us with any specifics or follow our Blogs at www.cjacksonlaw.com; or follow our Legal Thoughts Podcasts; or follow our Law Watch videos on our You-Tube Channel where we frequently discuss various topics dealing with taxation, contracts, litigation and immigration matters those folks ought to know about.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

That leads me right into my next question, Attorney –

Question 2: What is the number one type of tax imposed by the State of Texas that everyone in Texas needs to know about?

 

Attorney Answer – Question 2:

Well Alexis, property taxes that are imposed by local governments is clearly a tax everyone in Texas should be aware of since Texas is one of the highest property tax states in the nation.  Property Taxes are taxes imposed by local governments throughout the State of Texas.  All people residing in Texas need to know about the property tax system because this is how public schools are financed as well as public hospitals and health services and a number of other major local and municipal services.

Alexis with that said, the number one type of tax imposed by the state that everyone needs to be aware of is the Texas Limited Sales, Use and Excise tax which is applies to most purchases of goods and some services.

Remember, as I previously stated; Texas does not have a state income tax.  So, our listeners should be asking themselves; so how does the State of Texas pay its bills?   The Limited Sales, Use & Excise Tax is; by far, the biggest tax revenue generator for the State of Texas.  The Limited Sales, Use, & Excise Tax generates about 58% of Texas’ tax revenues annually. This is the first major tax imposed by the State of Texas that everyone in Texas must be aware of.  Anyone operating a business or thinking about starting a business in Texas must do their due diligence with respect to whether their products, goods and services are subject to the Limited Sales, Use, & Excise Tax. If their products and services are subject to this tax; the business-owner is a trustee for the State of Texas and must obtain a sales tax permit, collect the appropriate sales taxes from each transaction and report and submit the monies to Texas Comptroller of Public Accounts, who is the chief tax collector for the State of Texas.  Business owners and other responsible parties can become personally liable for messing with Texas with respect to these sales, use and excise tax matters.

Texas imposes a 6.25% sales and use tax on sales, leases and rentals of touchable movable property (“tangible property”) and on certain specified services in Texas Tax Code Section 151.  Localities are also allowed to impose up to a maximum of 2% sales and use tax with respect to transactions within their jurisdictions.  The maximum limited sales, excise and use tax permitted in the Texas Tax Code is 8.25% of the gross taxable sales amount.

The sales and use tax are complimentary which means that Texas only gets to collect the tax as a sales tax paid by the purchaser at the time of the sale, or as a use tax paid by the merchant in the event the sales tax was not paid by the purchaser at the time of the sale.  Bottom line, the tax should only be paid once either as a sales tax or as a use tax.  Merchants in Texas are required under the Texas Tax Code to collect the tax as a trustee for the state of Texas.  Since the United States Supreme Court’s Wayfair decision, a couple of years ago, out of state merchants selling customers in the state of Texas could be subject to the same Texas Tax Code obligations as brick and mortal merchants operating with facilities and agents physically within the state.  The Texas Comptroller has issued guidance for out of state providers of taxable services and goods selling to customers inside Texas which can be found on the Comptroller’s website.

Any merchant inside the state or outside of the state who conducts a business subject to the Texas Limited Sales, Use and Excise Tax must obtain a sales tax permit from the Texas Comptroller of Public Accounts.  Again, the Texas Comptroller of Public Accounts is the chief tax collector for the State of Texas who administers the Texas Tax Code.  All kinds of useful and informative information can be found on the Comptroller’s website.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Question 3: Attorney, is there any other major tax imposed by the State of Texas that impacts business owners in Texas?

 

Attorney Answer – Question 3:

Alexis, another major tax imposed in Texas is the Texas Franchise tax; which is also known as the Margin’s Tax.  The Texas Franchise Tax is a tax imposed on some businesses for the privilege of doing business in Texas. Anyone interested in this topic can find this tax in the Texas Tax Code.

Several entities subject to the Texas Franchise Tax are:

  • Corporations;
  • Limited Liability Companies (LLC, including single member and/or husband and wife owned LLC);
  • Banks;
  • State limited banking associations;
  • Savings and loan associations;
  • S Corporations;
  • Professional Corporations;
  • Partnerships (general, limited and limited liability);
  • Trusts;
  • Professional Associations;
  • Joint Ventures; and
  • Other business entities not exempt by statute

Entities not subject to the Franchise tax are:

  • Sole Proprietorships;
  • General Partnerships (when ownership consist solely of natural persons or individuals. The partnership cannot have any legal entity owners);
  • Certain grantor trusts , estates of natural persons and escrows;
  • Exempt entities under Tax Code Section 171, Subchapter B;
  • Various other unincorporated passive entities, real estate investment trusts and entities classified under Insurance Code Chapter 2212;
  • Certain trust subject to Internal Revenue Code Section 401(a) or 501(c)(9).

Alexis, the actual computation of the Texas Franchise Tax can be an extremely complicated accounting computation; and any business subject to this tax should hire a very competent Certified Public Accountant who works with business owners who must regularly pay franchise taxes.  Many businesses; perhaps most Texas businesses, who are subject to the Texas Franchise Tax only have to file a no-tax due report each year.  Franchise tax reports are filed annually online with the Texas Comptroller of Public Accounts and there are penalties for failure to file and/or failure to timely pay any franchise taxes that are due for the period.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant
Attorney, so far, we’ve been discussing some of the taxes imposed by local governments, property tax in particular imposed locally, and some of the important taxes imposed by the State of Texas in this podcast – for example, the sales, use and excise tax and franchise tax.  There are some upcoming changes on the federal law horizon that you mentioned to me a few of days ago, and I thinking we should wrap up this podcast by explaining that.
Question 4: Attorney, can you briefly explain the Corporate Transparency Act and its key provisions?

 

Attorney Answer – Question 4:

This is a great question and it’s a very important one!

This past year, Congress passed the Corporate Transparency Act (CTA) as a part of the Anti-Money Laundering Act of 2020 (AMLA). The stated goal of the AMLA was to aid the federal government in detecting and preventing money laundering, tax fraud and other illicit activities.

The Corporate Transparency Act, as a result, imposes new mandatory reporting obligations with the stated intention of catching and stopping this illicit behavior. The FinCEN reports created under this mandatory rule are called, “Beneficial Ownership Information Reports” or BOI reports. The Corporate Transparency Act will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners—the persons who ultimately own or control the company, to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

The Corporate Transparency Act and its new reporting requirements is a huge change coming for all businesses structured under any state or tribal entity organization structuring laws and impose significant new disclosure obligations on business organizers and business owners of entities structured under state and tribal business organizational laws.  The Financial Crimes Network (FinCEN) is the U.S. Department of Treasury agency authorized to enforce the Corporate Transparency Act.

The final rules implementing the Corporate Transparency Act was published by the Financial Crimes Network (FinCEN) on September 30, 2022 in the Federal Register, and applies to domestic & foreign “reporting companies of all sizes, including the smallest of companies.”

A reporting company is a corporation, limited liability company, or any other entity created by filing entity structuring instruments with a secretary of state or any similar office under the law of a state.

  • For example, in Texas, the term “reporting companies” would include most business entities structured under the Business Organization Code, with the exception of sole proprietorships and general partnerships. If the business filed organizational documents with the Texas Secretary of State, the final FinCEN rules implementing the Corporate Transparency Act applies to them.

A “beneficial owner” under the FinCEN final rule includes any individual who, directly or indirectly:

  1. exercises substantial control over a reporting company, or
  2. owns or controls at least 25 percent of the ownership interests in a reporting company.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Attorney, these sound like huge changes for business owners!  Do you mean to say that the rules apply to even a mom-and-pop business that operates as an LLC!

Question 5: What kind of information will this mom-and-pop organization and other businesses structured under state law have to file and where will they have to file it?

 

Attorney Answer – Question 5:

Yes, Alexis, that is exactly what I am saying.  The final FinCEN rules do not exempt small business from the obligations imposed on affected business organizations.  The rules apply to the mom-and-pop limited liability company as well as other businesses structured under state and tribal laws.  They all meet the definition of ‘reporting company’ and must comply with the reporting rules.

When a reporting company files a “Beneficial Ownership Information Report,” or BOI report, with the Financial Crimes Network (FinCEN), they are required to identify themselves and report four types of information about each of its beneficial owners:

  1. Name
  2. Birthdate
  3. Address, and
  4. A unique identifying number issued by a jurisdiction in an acceptable document. A copy of this acceptable identifying document must be sent to FinCEN for inspection.  The document must be valid and current.

The FinCEN final rules implementing the Corporate Transparency Act and the related new reporting obligations are effective on January 1, 2024.

  • Reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial BOI reports
  • Reporting companies created or registered after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial BOI reports.

Alexis, our law firm will continue to monitor developments with respect to the Corporate Transparency Act and FinCEN announcements implementing the BOI rules.  Our office has been filing FBAR reports with the Financial Crimes Network on behalf of taxpayers for years now; and FinCEN is where the new BOI reports will be filed as well.  Any of our listeners should follow our blogs and Legal Thoughts Podcasts where we discuss these types of topics.

 

Interviewer Wrap-Up

Attorney, thank you for siting with me today to explain the tax obligations of starting a new business in Texas. Today the key take aways from this podcast discussion are:

  1. Texas sales & use tax in Texas: This is a major tax imposed by the State of Texas impacting everyone who buys or sales goods and certain services,
  2. Texas Franchise tax: This too is a major tax imposed by the State of Texas on certain business structured under the Texas Business Organization Code and filed with the Texas Secretary of State, and potentially the big federal rule. Attorney even impacting
  3. Corporate Transparency Act: This is a new, big federal rule coming up in 2024. The new mandatory rule issued by the Financial Crimes Network (FinCEN) requires businesses structured under state or tribal entity organizational laws to file “Beneficial Ownership Information Reports” with the Financial Crimes Network. This rule is wide-reaching and will even impact the small mom-and-pop LLCs. Our office needs to watch the BOI report developments and perhaps produce future blogs, videocast and Legal Thoughts podcasts on this topic.

 

To our listeners who want to hear more podcast like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Take care, everyone! And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers:  214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

 

Attorney Closing Remarks

This is the end of today’s Legal Thoughts!

Thank you all for giving us the opportunity to inform you about: “Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports”

If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

Taxpayer’s Responsibility to Substantiate the Numbers on Their Federal Tax Return

By Coleman Jackson, Attorney and Certified Public Accountant

October 11, 2022

As a general rule a taxpayer is allowed a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.  This basic tax rule is set forth in Internal Revenue Code Section 162.  The particular tax return that a taxpayer’s file depends upon how the business is structured under applicable state business organizational law and certain timely tax elections that the business owners make.  That sounds wonderful; but don’t move too fast because the Internal Revenue Service is not going to simply take the taxpayer’s word for it.  Generally, taxpayers are required to keep records in sufficient quality to establish the amounts, dates and business purpose of the items recorded on their tax return. Taxpayers generally bear the burden to show that they are entitled to deduct an expense on their tax return.  See Internal Revenue Regulation Section 1.6001.  Sometimes taxpayers can establish that an expense has occurred during a tax period, but cannot establish the exact amount.  When this occurs, the taxpayer must produce sufficient evidence to permit an estimation of the amount deductible on the tax return.  See Vanicek v Commissioner, 85 T.C. 731, 743 (1985).


Internal Revenue Code Section 274 sets forth detailed substantiation requirements to which taxpayers must adhere.  Treasury Regulation 1.274(d) sets out several categories of expenses that require enhanced substantiation.  Generally, the taxpayer substantiates their tax deductions by either adequate records or sufficient probative evidence that corroborates the taxpayer’s statements and opinions concerning the deductibility of the expense.  The substantiation burden only requires that the taxpayer maintain sufficient records and documentary evidence to establish the date, amount and business purpose or use of the expenditure.  The taxpayer’s words alone; however, are insufficient substantiation.  But the taxpayer’s written or oral words are sufficient to substantiate the deductibility of the expenditure if it is supported by credible corroborative evidence sufficiently establishing the deductibility of the expense.  As stated before, the burden to show that expenditures are deductible belongs to the taxpayer at all times. The United States Supreme Court has established this burden issue long ago in a case called New Colonial Ice Co. v Helvering, 292 U.S. 435, 440 (1934).  Yes, that means the taxpayer must prove that the expense is deductible in the first place.  In other words, the taxpayer must always prove deductibility of an expense upon challenge by the IRS.  Moreover, see also Internal Revenue Regulation 1.274. (d) regarding the enhanced substantiation requirements on certain categories of expenses.


For the non-tax lawyer and non-tax professional, this might all seem very esoterically complicated.  Like lifting weights—start with a weight that you can easily lift and graduate to more and more weight until you have achieved your goal.  Our goal here is to explain this in layman’s terms; so that, layman can understand the tax concepts of deductibility, substantiation and burden as these terms apply to their tax return.  Let’s try to explain substantiation in layman’s terms:  to be deductible on the taxpayer’s tax return all expenditures must meet three requirements, and possibly four as follows:

  1. Be incurred in pursuit of a trade or business (this means personal expenses don’t count);
  2. Be an ordinary and necessary expense (this means expenditures common to the taxpayer’s trade, group or industry);
  3. Be substantiated by sufficient records or documentation, which can include the taxpayer’s corroborated written and oral statements; and for some expense categories;
  4. Be subject to enhanced or stricter substantiation, such as, contemporaneous logs, charts, and diaries.

Looking at someone play sports is not the same as actually participating in sports.  Neither is reading about tax substantiation in a blog the same as actually running a trade or business in real time and sufficiently substantiating tax expenditures in preparation for the day when the Internal Revenue Service Auditor knocks on the door.  Like locks on our doors are preparatory; the expenditure substantiating taxpayer don’t expect the auditor’s knock, but is prepared if it comes.  It’s kind of like being prepared when a thief comes by having locks, alarms and even attack dogs.  What might these preparatory things look like?

“Ordinarily, documentary evidence will be considered adequate to support an expenditure if it includes sufficient information to establish the amount, date, place, and the essential character of the expenditure.  For example, a hotel receipt is sufficient to support expenditures for business travel if it contains the following: name, location, date, and separate amounts for charges such as for lodging, meals, and telephone.  Similarly, a restaurant receipt is sufficient to support an expenditure for a business meal if it contains the following:  name and location of the restaurant, the date and amount of the expenditure, the number of people served, and, if a charge is made for an item other than meals and beverages, and indication that such is the case.  A document may be indicative of only one (or part of one) element of an expenditure.  Thus, a cancelled check, together with a bill from the payee, ordinarily would establish the element of cost.  In contrast, a canceled check payable to a named payee would not by itself support a business expenditure without other evidence showing that a check was used for certain business purpose.”  See Internal Revenue Code 274.

If a taxpayer with a canceled check payable to a named payee is struggling to lift the substantiation weight, one can only imagine the plight of the taxpayer who conducts its business in cash.  Cash is a completely inappropriate way to conduct business.  But many foreign immigrants came from societies and cultures where business is routinely conducted in cash.    Cash cannot be substantiated and an IRS auditor is very likely to deny any and all expenditures paid in cash unless the taxpayer has serious corroborating evidence to back up their written or oral word.  When paying contract labor and other expenses by cash, the taxpayer voluntarily places onto themselves and their company’s enormous weight because Internal Revenue Code Section 6663(a) states that if any part of any underpayment of tax required to be shown on a tax return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.  See Tax Court case styled, Petzoldt v. Commissioner92 T.C. 661, 699 (1989).  Construction companies and other taxpayers must be sure to substantiate their contract labor or other labor costs by obtaining accurate and complete Form W-9 from all workers who are independent contractors and Form W-4 for workers who are employees, by filing all Form 1099 Miscellaneous with the Internal Revenue Service for all independent contractors or file Form W-2 for employees, withholding the proper tax amounts when required by law, by paying all workers by check and documenting the labor transactions in their books and records.  Numerous federal courts have stated that dealing in excessive amounts of cash is an indicia of tax fraud.  Courts have said that other indicia of tax fraud are (1) substantial understatement of income, (2) maintenance of inadequate records; and 3) implausible or inconsistent explanations of behavior.  See Bradford v Commissioner, 796 F.2d 303, 307 (9th Cir. 1986).  Taxpayer’s demonstrating two or more of these characteristics are all but certain to be charged with the tax fraud penalty and possibly referral to the IRS Criminal Investigations Unit.  See Otsuki v Commissioner, 53 T.C. 96, 106 (1969) and Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984).

And for expenses, such as, car and truck expenses, taxpayers must comply with the weightier substantiation requirements of Internal Revenue Code Section 274(d) which requires the taxpayer to substantiate vehicle, entertainment, travel and certain other listed expenses by sufficient evidence corroborating the taxpayer’s own statements.  Under the stricter substantiation rules taxpayers must maintain adequate records, such as, account books, diaries, logs, statements of expense, trip sheets, or similar records prepared contemporaneously with the use or incurrence of the expenditure and documentary evidence such as receipts or bills.  See Jijun Chen and Xiujing Gu v. Commissioner (T.C. Memo 2015-167) a recent Tax Court case dealing with disallowance of personal car and truck expenses.  The IRC 274(d) enhanced substantiation requirements are set forth in Internal Revenue Regulations Section 1.274-5T.  Remember that locks, alarms and attack dogs are to prepare for the thief or robber.  Taxpayers are responsible for substantiating the numbers on their tax returns, and knowing and properly implementing these taxpayer substantiation requirements are preparatory in the event the tax auditor comes knocking.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432

FBAR Filing Requirements & Penalties

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published October 3, 2022

Overview:

Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Alexis Brewer, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “FBAR Filing Requirements & Penalties.”

You can listen to this podcast by clicking here:

If you enjoy this podcast, make sure to stay tuned for more episodes from the taxation, litigation, and immigration Law Firm of Coleman Jackson, P.C. Be sure to subscribe. Visit the taxation, litigation and immigration law firm of Coleman Jackson, P.C. online at www.cjacksonlaw.com.

 

TRANSCRIPT:

ATTORNEY: Coleman Jackson

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

 

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Alexis Brewer – Tax Legal Assistant, Leiliane Godeiro – Litigation Legal Assistant, Gladys Marcos – Immigration Legal Assistant, and Johanna Powell – Tax Legal Assistant.

On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Alexis Brewer, will be interviewing me on the important topic of: FBAR filing requirements & penalties.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Hi everyone, my name is Alexis Brewer and I am a Tax Legal Assistant at the tax, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this hot tax topic: “FBAR filing requirements & penalties”.

Let’s jump right in,

Question 1: What does FBAR stand for and why was it created?

 

Attorney Answer – Question 1:

Good afternoon, Alexis.

Under the Bank Secrecy Act (BSA), the Department of Treasury was given authority to collect information from a US person who have financial interests in or signature authority over foreign bank and financial accounts. FBAR stands for Foreign Bank Account Report.

The FBAR, or FinCEN Form 114, is an annual report that US persons are required to file if they hold foreign accounts which have a balance exceeding $10,000 at any time during the reporting year in a single account or combination of accounts.

The Report of Foreign Bank and Financial Accounts (FBAR) is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is also a tool used by the United States government to identify persons who may be using foreign financial accounts to circumvent United States law. Information contained in FBARs can be used to identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

In April 2003, the Financial Crimes and Enforcement Network (FinCEN) delegated enforcement authority regarding the FBAR to the Internal Revenue Service (IRS). The IRS is now responsible for:

  • Investigating possible civil violations;
  • Assessing and collecting civil penalties; and
  • Issuing administrative rulings.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Question 2: What is the FBAR filing requirement?

 

Attorney Answer – Question 2:

That’s a great question.

Under the Bank Secrecy Act, US persons with a financial interest in a financial account in a foreign country are required to keep record of and report such accounts to the U.S. Department of Treasury.

  • “US persons” includes: citizens, residents, corporations, partnerships, limited liability companies, trusts and estates.

A person is treated as having a “financial interest” in any foreign account that the person owns or that is owned by a corporation in which the person has an ownership interest greater than 51%.

FBAR filing is required for foreign financial accounts exceeding $10,000

  • This $10,000 threshold amount is an aggregate amount, meaning it is the value of all foreign accounts combined.
  • If at ANY TIME DURING THE YEAR the cumulative amount of a person’s foreign accounts is more than $10,000, they must file an FBAR.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Question 3: What constitutes an FBAR violation?

 

Attorney Answer – Question 3:

This has been a big question in the courts, but the IRS and the Fifth Circuit Court of Appeals (the federal court that governs Texas) are in agreement.

An FBAR violation is the failure to report a financial account on the FBAR form. It is not the failure to file an FBAR in general.

This means that you can have several FBAR violations in a single year for each financial account you fail to report or improperly report.

For example, if an U.S. person has 25 separate bank accounts exceeding the reporting threshold of $10,000 in 2022 and they fail to file a Form 114 for this period, the IRS and the 5th Circuit Court of Appeals think that this U.S. person has 25 FBAR violations, not one.  FBAR violations are on an account basis not forms basis.  Some of the other Circuit Courts have taken a forms view when imposing FBAR penalties.  The United States Supreme Court has not ruled on this issue although there is a spit in the circuits which means different FBAR violation penalties can be assessed by the IRS depending upon where the U.S. person resides.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Well Attorney, what are the actual penalties for FBAR violations?

 

Attorney Answer – Question 4:

Anyone who is required to file an FBAR and fail to file a complete and accurate FBAR could be subject to civil monetary penalties, criminal prosecution or both.  Civil penalties are inflation adjusted each year; so I am going to skip giving out exact penalty amounts since they would change from year to year.  Criminal penalties for knowingly and willfully filing false FBAR reports can be up to $10,000 fine or five years in prison on both.  Criminal penalties are based on the facts and circumstances and can even be higher.

FBAR Penalties are authorized in the Bank Secrecy Act; 31 U.S.C. 5321.  In addition to the criminal penalties authorized by the law, there are four types of civil monetary penalties for failing to file an FBAR or failing to maintain proper records for the five year required record keeping period as follows:

  • Negligent Violation Penalties up to the maximum amount in 31 Code of Federal Regulation 1010.821;
  • Pattern of Negligent Activity Penalties up to the maximum amount in 31 Code of Federal Regulation 1010.821;
  • Non-Willful Violation up to the maximum amount 31 Code of Federal Regulation 1010.821; and
  • Willful Violation Penalties up to the greater of the amount in 31 Code of Federal Regulation 1010.821, or 50% of the amount in the account at the time of the violation

FBAR filers can also be assessed these criminal and monetary penalties for failure to keep records of foreign accounts for five years from the due date of the FBAR, which is April 15 of the following calendar year.  The types of information that must be kept for 5 years from the due date of the FBAR are records that show–

  • Name in which each foreign account is maintained;
  • Foreign bank account number or identifying number;
  • Name and address of the foreign financial institution;
  • Type of foreign account, such as, savings or checking; and
  • Maximum value of each account during the reporting period.

These records must be presented to the IRS for inspection upon request.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Attorney, you’ve talked about different penalties depending on if the violation was willful or not.

Question no. 5: What does it mean to “willfully” violate FBAR?

 

Attorney Answer – Question 5:

The test for willfulness is an objective standard. What I mean is that the standard is not subjective or what the particular taxpayer knew or thought but what an objective taxpayer in similar circumstances would have known or thought.

Courts will consider whether a person knew or should have known about an “unjustifiably high risk of harm.”

In layman’s language, courts consider whether the taxpayer knew or should’ve known that there was a high risk that an accurate FBAR was not being filed and whether (s)he was in a position to find out for certain with little effort or not.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

You’ve discussed a lot, Attorney.

Question no. 6: In summary, what do listeners need to remember about FBAR filing requirements?

 

Attorney Answer – Question 6:

 Well Alexis our listeners need to remember a few key points:

  1. If you have any type of foreign bank account or multiple foreign bank accounts with balances which exceeds $10,000 or more at ANY POINT DURING THE CALENDAR YEAR, you MUST CHECK TO SEE WHETHER YOU are subject to FBAR and must report such accounts to the Treasury Department. Foreign Accounts are reported to the Financial Crimes Network on April 15th of the following tax period and currently there is an automatic extension to October 15th. Records used to file an FBAR with FINCen must be kept for five years and be made available for inspection if the IRS request them.
  2. If you fail to report any foreign account subject to the FBAR filing requirement, you will be subject to civil and possible criminal penalties depending upon whether the violation was willful or non-willful and upon all the facts and circumstances.
    1. Remember, courts use a very broad definition for willful, and include taxpayers who knew about the FBAR requirement, who should’ve known about the FBAR requirement, and taxpayers who could easily find out about the FBAR requirement.
  3. Lastly, remember FBAR violations are per-account violations for residents living in Texas, Mississippi and Louisiana (states within the 5th Circuit Court of Appeals jurisdiction). This means that taxpayers will be subject to FBAR penalties for each unreported or misreported account. Some other jurisdictions within the United States are per-form violations.

 

Interviewer Wrap-Up

Attorney, thank you for siting with me today to explain FBAR, what the filing requirement is, and what the different penalties are for violations.

It seems like the take away here is that taxpayers need to be aware of their foreign accounts and the cumulative balances to avoid FBAR penalties.

 

To our listeners who want to hear more podcast like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Take care, everyone! And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers:  214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

 

Attorney Closing Remarks

This is the end of today’s Legal Thoughts!

Thank you all for giving us the opportunity to inform you about: “FBAR filing requirements & penalties”

If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

The Deadline for Employers and Other Payors for Sending Forms W-2, 1099-NEC and 1099 MISC is Approaching Fast! Penalties for Failure to Meet the January 31, 2022 Deadline Without Reasonable Cause Are Drastic!

By:  Coleman Jackson, Attorney & Certified Public Accountant
January 7, 2022

The Deadline for Employers and Other Payors for Sending Forms W-2, 1099-NEC and 1099 MISC is Approaching Fast!

 The Law:  Treasury Regulation Section 1.6041(a):

The federal income tax regulations require that anyone engaged in a trade or business must report compensation paid on Form 1096, Annual Summary and Transmittal of U.S. Information Returns and Form 1099 for non-employee compensation over $ 600 and on Form W-2 for employee compensation.  Form 1099 has been divided into a series of forms over the years.  The main ones are Form 1099-Misc which is used for reporting all kinds of payments to third parties and Form 1099-NEC which is used to report compensation paid to non-employees.  See Internal Revenue Code Section 6041.

 

The Deadline for Information Returns and Where: Internal Revenue Code Section 6071 

The Deadline for Information Returns and Where:  Internal Revenue Code Section 6071:

The deadline for sending employees Form W-2 and filing it with the Social Security Administration is January 31, 2022 for compensation paid in 2021.  The deadline for sending non-employees Form 1099-NEC and filing it with the Internal Revenue Service is January 31, 2022 for compensation for services incurred in 2021.  Since 2020 compensation of $600 or more paid to non-employees, including attorneys are to be reported on Form 1099-NEC; except for non-employee payments made to corporations.  Payments to corporations of attorneys are to be reported on Form 1099-MISC. For non-employee payments made during the course of conducting a trade or business, the deadline for filing Form 1099-MISC is also January 31, 2022.  January 31, 2022 is right around the corner; certain extensions are available if requested prior to January 31, 2022.

 

The Potential Legal Exposure to Employers and Other Payors of Compensation for Services

The Potential Legal Exposure to Employers and Other Payors of Compensation for Services:

An employer or payor of compensation for services who fails to supply accurate information forms, such as, Form W-2 to employees and Forms 1099-NEC to non-employees or Form 1099-Misc to non-employees can be assessed a penalty under Internal Revenue Code Section 6721 for the following violations of U.S. tax law:

  1. Failure to timely provide a correct Form W-2 to an employee;
  2. Failure to timely file a correct Form W-2 and related Form W-3 and Form 1096 to the Social Security Administration;
  3. Failure to timely provide a correct Form 1099-NEC to a non-employee;
  4. Failure to timely file a correct Form 1099-NEC with the Internal Revenue Service;
  5. Failure to timely provide a correct Form 1099-Misc to a payee when required;
  6. Failure to timely file a correct Form 1099-Misc with the Internal Revenue Service; and
  7. Note: the key point here is the timeliness of providing the proper form to the payee and timely filing the correct information to the proper governmental agencies.  For example, the employer does not file Form W-2 with the Internal Revenue Service.  Employers and other payors can incur penalties for failing report correct Social Security Numbers or valid ITINs or filing incomplete forms or illegible documents with the government.  Employers must ensure employees accurately complete Form I-9 at the time of their hire.  Moreover, all payors of compensation to non-employees must verify with the IRS that the tax identification numbers received by workers are properly issued to them.  Otherwise, payors of compensation can be subjected to substantial penalties. 

 Table of Potential Penalties for Untimely or Inaccurate Information Returns

Table of Potential Penalties for Untimely or Inaccurate Information Returns:

Internal Revenue Code Section 6721 and the implementation regulations permits the Internal Revenue Service to exercise discretion when charging penalties for failing to comply with U.S. tax law pertaining to information returns.  The Internal Revenue Service routinely charge separate penalties for failing to file a correct information return on time and failure to provide correct payee statements on time.  So, keep in mind when reviewing the penalty table below that there could be doubling of penalties:  one for untimely or failure to file the return with the appropriate governmental agency and two for untimely or failure to provide correct statements to employees or non-employee payees.  The following penalties in time can be very substantial and the maximum penalty allowed under the law for negligent violations differ depending on the size of the employer.  Intentional violators of these information return laws are subject to a wide range of civil penalties under U.S. tax law, criminal sanctions are also a real possibility for tax fraud.  See Internal Revenue Code Section 7204, Tax Crimes, Other Offenses and Forfeitures.  Moreover, whenever a taxpayer violates tax laws with intent, willfully or with reckless abandonment they expose themselves and their organizations to legal exposures under other laws pertaining to defrauding the U.S. government. In this blog we will limit our analysis and discussion to civil actions.  Interested readers should follow our blog site where we routinely write about taxation, government contracts, contract litigation and immigration law matters; which are, areas of law that we practice at Coleman Jackson, P.C.

Potential Civil Charges for Each Information Return or Payee Statement:

Tax Year Up to 30 Days Late 31 Days Late Through August 1 After August 1 or Not Filed Intentional Disregard
2023 $50 $110 $290 $580
2022 $50 $110 $280 $570
2021 $50 $110 $280 $560
2020 $50 $110 $270 $550
2019 $50 $100 $270 $540
2018 $50 $100 $260 $530
2017 $50 $100 $260 $520
2016 $50 $100 $260 $520
2015 – 2011 $30 $60 $100 $250

 

I should point out here that although we label the following table in this blog using the term, ‘potential charges’; there is nothing uncertain about these penalty assessments.  I do not want you to think that there is some doubt as whether the IRS will enforce the law against violators of the information return reporting laws.  These penalties are routinely assessed practically automatically when an IRS agent or examiner audits the taxpayer or the IRS otherwise discovers the problem through informants, disgruntled workers, payees, conflicting information in Form 941, Form 940 and Form 1096, incongruent tax positions taken by the taxpayer, such as 1099A positions or otherwise. In recent years, the IRS Civil and Criminal Divisions seemed to have focused on payroll tax compliance issues.   Penalties for failure to timely provide and file information returns are subject to interest just like other penalties under other provisions of the Internal Revenue Code.  Criminal provisions in U.S. tax law also exposes violators to potential prosecution.

 

What Can an Employer Do if Potential Compliance Issues Lurk in the Dark at their Establishments?

What Can an Employer Do if Potential Compliance Issues Lurk in the Dark at their Establishments?

Establishments engaged in a trade or business should first of all consider reviewing their 2021 expenses prior to the January 31, 2022 information return filing deadline and make sure that they timely provide employees and non-employees correct statements.  Moreover, they should consider filing the correct reports with the correct governmental agency.

In the event an establishment engaged in a trade or business conducts a review of its expenses and determines that they have filed incorrect information reports in the past, they should consider providing corrected statements to their workers or other non-employee payees.  This is especially true if they timely files the corrected forms with the appropriate governmental officials.  Information returns, if timely corrected may not be subjected to these penalties.  There is however a very short window to amend and file corrected information reports.  These information reports must be corrected within approximately six months of their respective due date(s).

Now, in the event the returns cannot be corrected by amendment; taxpayers who can show that the information return violations were due to reasonable cause or that their failure to comply with federal tax laws were not due to any fault of their own or that the violations of law were due to causes beyond their powers or controls could potentially successfully get the penalties abated in part or in total. An abatement of penalty request is simply a way the taxpayer can seek forgiveness.  The request is based in fundamental fairness and justice and requires good faith and a genuine basis in fact and law.  The traditional penalty abatement procedures and rules apply to abatement of penalty request associated with violations of the federal information return tax laws. The decision to ask for an abatement of penalties should not be filed lightly since frivolous refund requests applies to abatement requests.  Frivolous or groundless requests are subject to a 20% penalty under U.S. tax law.  These requests need to be based in law with the marshalling of documentary evidence, witness testimony and other credible substantiating evidence.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

IRS Cautions Taxpayers About Fake Charities and Scammers Targeting Immigrants

By Coleman Jackson, Attorney & Counselor and CPA
August 01, 2021

IRS Cautions Taxpayers About Fake Charities and Scammers Targeting Immigrants
The IRS continues to observe criminals using a variety of scams that target honest taxpayers. In some cases, these scams will trick taxpayers into doing something illegal or that ultimately causes them financial harm. In this blog we will discuss about Fake Charities and Immigrant Fraud which are part of the “Dirty Dozen” of tax scams list in 2021.


Fake charities

Fake charities

Taxpayers should be on the lookout for scammers who set up fake organizations to take advantage of the public’s generosity. Scammers take advantage of tragedies and disasters.

Scams requesting donations for disaster relief efforts are especially common over the phone. Taxpayers should always check out a charity before they donate, and they should not feel pressured to give immediately.

Taxpayers who give money or goods to a charity may be able to claim a deduction on their federal tax return by reducing the amount of their taxable income. However, to receive a deduction, taxpayers must donate to a qualified charity. To check the status of a charity, they can use the IRS Tax Exempt Organization Search tool. It’s also important for taxpayers to remember that they can’t deduct gifts to individuals or to political organizations and candidates.

Here are some tips to help taxpayer avoid fake charity scams:

  • Individuals should never let any caller pressure them. A legitimate charity will be happy to get a donation at any time, so there’s no rush. Donors are encouraged to take time to do their own research.
  • Confirm the charity is real. Potential donors should ask the fundraiser for the charity’s exact name, website and mailing address, so they can confirm it later. Some dishonest telemarketers use names that sound like well-known charities to confuse people.
  • Be careful about how a donation is made. Taxpayers shouldn’t work with charities that ask for donations by giving numbers from a gift card or by wiring money. That’s a scam. It’s safest to pay by credit card or check – and only after researching the charity.


Immigrant fraud

Immigrant fraud

IRS impersonators and other scammers often use threats and intimidation to target groups with limited English proficiency.

The IRS phone impersonation scam remains a common scam. This is where a taxpayer receives a phone call threatening jail time, deportation or revocation of a driver’s license from someone claiming to be with the IRS. Recent immigrants often are the most vulnerable. People need to ignore these threats and not engage the scammers.

A taxpayer’s first contact with the IRS will usually be through mail, not over the phone. Legitimate IRS employees will not threaten to revoke licenses or have a person deported. These are scare tactics.

 

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

Cash Intensive Businesses Need Good Internal Controls to Substantiate Business Activity

By Coleman Jackson, Attorney & Counselor and CPA
July 17, 2021

Cash Intensive Businesses Need Good Internal Controls to Substantiate Business Activity

Operating a business enterprise with cash can be an IRS audit flag because businesses operating in cash are susceptible to fraudulent financial transactions.  However certain business operations handle a lot of cash in their normal operations.  These businesses are classified in tax parlance as cash intensive businesses.  Convenience stores, donut shops, massage parlors, hair stylist, mini-marts, bodegas, coin operated amusements venues; such as video games, pinball machines, jukeboxes, pool tables, slot machines and other gaming machines to only name a few classic cash intensive businesses.  All of these types of businesses can legitimately operate with a high incident of cash transactions.  So, there is absolutely no badge or indicia of fraud exist in most of these cash intensive businesses.  Marijuana operators are another example of perhaps legitimate businesses operating in cash.  Where the marijuana operators being legal, they must operate in cash because the use, sell and distribution of marijuana is illegal under federal drug enforcement laws even though several states have legalized this drug for medicinal as well as entertaining purposes in some cases.  Since it is illegal under federal law to sell or distribute marijuana, those enterprises that sell and distribute marijuana cannot use the normal banking system.  And certain laundry facilities also are coin operated businesses.  They too are legitimately cash intensive businesses.  All of these cash intensive businesses have one thing in common, cash is fungible and hard to trace.  Therefore, when the IRS examiner comes to audit their books and records, it can be a challenging experience for the auditor and extremely frightening to the cash intensive business owner.

 

Cash Intensive Businesses Need Good Internal Controls to Substantiate Business Activity

It is not lost on the State of Texas and IRS examiner that cash operated businesses can have multiple sets of books and records or no records at all.  And often when they have records, they are poor, incomplete and inaccurate.  The basic issue is proper accounting for transactions during the audit period:  are sales, purchases, and inventory properly and timely accounted for where the operator and the auditor can timely and accurate compute taxes owed and the operator can submit the right amount of taxes to the tax authorities?  These questions are proper concerns of any auditor who examines the books and records of any cash intensive business.  Personal expenses paid out of the cash of the business.  Business expenses paid with cash from receipts without any records.  Personal use of items purchased.  Physical inventories none existent or sporadic which leads to missing, stolen or unaccountable purchased items.  Cash sales recorded on paper or separate ledgers completely separate and distinct from credit card sales registers or any register tape at all.  Multiple employees using the same cash drawers without any accountability or cash reports or registry procedures or system of control.  Now these things could be done intentionally, but, quite often they are done unintentionally.  Many immigrants work in cash intensive businesses and many come to the United States where different cultural and business norms apply with regards to operation of a business enterprise.  They are not familiar with the requirements to keep timely and accurate business records for Texas limited sales, use and excise tax purposes and federal income tax purposes.  Many immigrants are surprised and afraid when the Texas or Federal tax examiner knocks on their door.  Good internal controls can serve the auditor well and lessen the fear of the business owner.

Cash Intensive Businesses Need Good Internal Controls to Substantiate Business Activity

Internal Controls is an accounting process.  It is a very important process in any business to account for the receipts of money, disbursement of money and account for the inventory and property of the business.  Cash intensive businesses should implement strong internal controls because cash is fungible.  Internal controls are the process or systems in place to ensure the efficient and effective capturing of critical data to ensure that the business can run with accountably to its owners and consistent with the owners’ objectives;  produce reliable and accurate financial summaries for management purposes and pursuant to outside obligations; and reports and comply with applicable laws, regulations and ordinances.  In order for a business to have effective internal control requires that the job duties of employees who collect the money, record the money and review the money reports are adequately separated.  Internal controls require documentation, documentation and more documentation.  And this is critical for cash intensive businesses because under the Texas Tax Code all businesses must keep accurate contemporaneous books and records.  The Internal Revenue Code requires the same for federal tax purposes; and it also requires taxpayers to substantiate its receipts and deductions upon IRS examination.  Cash intensive business owners will do well to review their internal controls prior to a visit by auditors from either the Texas Comptroller of Public Accounts or the Internal Revenue Service to ensure that they are in compliance with all applicable tax laws.

 

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

Here’s Why People Filing Taxes Should Be Careful When Selecting A Professional Tax Return Preparer | LEGAL THOUGHTS

Coleman Jackson, P.C. | Transcript of Legal Thoughts Podcast
Published March 10, 2021.

Here’s Why People Filing Taxes Should Be Careful When Selecting A Professional Tax Return Preparer

Legal Thoughts is a podcast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation and immigration legal matters.

This particular episode of Legal Thoughts is a podcast where the Attorney, Coleman Jackson is being interviewed by Reyna Munoz, Immigration Legal Assistant of Coleman Jackson, P.C.   The topic of discussion is ““Here’s why people filing taxes should be careful when selecting a professional tax return preparer.” You can listen to this podcast by clicking here:

You can also listen to this episode and subscribe to Coleman Jackson, P.C.’s Legal Thoughts podcast on Apple Podcast, Google Podcast, Spotify, Cashbox or wherever you may listen to your podcast.

TRANSCRIPT:

ATTORNEY:  Coleman Jackson
Legal Thoughts
COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY:  Coleman Jackson

Welcome to Tax Thoughts

  • My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.
  • Our topic for today is: “Here’s why people filing taxes should be careful when selecting a professional tax return preparer.”
  • Other members of Coleman Jackson, P.C. are Yulissa Molina, Tax Legal Assistant, Leiliane Godeiro, Litigation Legal Assistant, Reyna Munoz, Immigration Legal Assistant and Mayra Torres, Public Relations Associate.
  • On this “Legal Thoughts” podcast our public relations associate, Mayra Torres will be asking the questions and I will be responding to her questions on this important tax topic: Here’s why people filing taxes should be careful when selecting a professional tax return preparer.”

Interviewer:  Mayra Torres, Public Relations Associate

  • Good morning everyone. My name is Mayra Torres and I am the public relations associate at Coleman Jackson, P.C.  Coleman Jackson, P.C. is a law firm based right here in Dallas Texas representing clients from around the world in taxation, litigation and immigration law.
  • Attorney today we are discussing a very important tax topic because filing taxes is on folks minds these days. Many people may be filing taxes for the first time this year because of the recovery rebate credit issues involving their economic impact payments and other Covid-19 relief received during 2020.
  • In this Podcast, we will be discussing the safest, easiest and perhaps cheapest way folks can file their tax returns.

Question 1:

Attorney let’s start with the cheapest way folks can file their taxes for 2020!  What options exist for people who do not want to pay a professional tax return preparer?  I mean, can people file their tax returns for free?

Attorney Answers Question 1:

  • Good morning Mayra.
  • First people can always prepare and file their tax return themselves without hiring and paying anyone.
  • Second people can go to IRS.gov and select a number of brand-name tax software providers who will permit certain eligible taxpayers to use their software to prepare and electronically file their individual tax return for absolutely free. This particular free tax preparation option might be an excellent option for some taxpayers.  Typically, the software providers require people to meet certain income, age and state residency requirements.  The software vendors’ individual qualifying requirements can be found at IRS.gov. Most of the free vendors software is in English, but a few are in Spanish.  This free file option is certainly an option that taxpayers should explore.
  • Third people can use possibly find free tax preparer clients hosted by various accounting and legal societies throughout the community. Some churches and business and law schools also provide minimum fee tax advice and counsel.  People should contact the professional schools in their communities to inquire whether students in tax law training provide such services to the community.  When I attended SMU School of Law, I participated in their tax clinic that provided free or minimum fee tax controversy services by enrolled students under the supervision of the tax clinic professor.  People should make inquiries at professional societies, schools, and places of worship to see what’s available.
  • So to summarize; Mayra, as you can see there are a number of options available for people to get their tax returns prepared at little to no costs.

Interviewer:  Mayra Torres, Public Relations Associate

That is an excellent summary of the free or low-cost tax return preparation and filing options that might be available to people this year:

  1. people can prepare and file their returns without using anyone to help them;
  2. People can go to IRS.gov and select a brand-named software provider to prepare and file their return if they meet the provider’s qualification requirements, and
  3. People can search for a free or low-cost professional tax return preparer at local places of worship, or professional accounting or law societies or local law school tax clinics and accounting schools.

Question 2:

Attorney, some people can’t qualify for one of these free or low-cost tax preparation services. Some people just think taxes are very complex; they can’t prepare these complicated tax returns themselves, and they just want to hire someone to prepare the return and file it for them.  What characteristics and qualifications should people look for when hiring a tax return preparer?

Attorney Answers Question 2:

  • Mayra, that is a very good question since people are responsible for the accuracy of their tax return regardless of whether they prepare and file it themselves or hire someone else to prepare and file their return.
  • These are some of the things that people might should consider when selecting a tax return preparer:
    1. Indicial of educational training in tax law and tax accounting. This might be evidenced by a degree from college in taxes, accounting, law, finance, or some related business degree.  Return preparer might be qualified with only certificates but with increasing complexity of the tax issues involved, should cause taxpayers to exercise more exacting screening of a tax return preparer before they hire them to work on their return.
    2. Professional Tax Identification Number (or PTIN). The PTIN is an annual credentialing issued by the Department of Treasury to professionals authorized to practice before the Internal Revenue Service as paid tax return preparers. To obtain a PTIN, a tax professional must be an attorney in good standing with a State Bar Association, a licensed Certified Public Accountant in good standing with a state CPA licensing authority, an enrolled agent in good standing with the Internal Revenue Service, or a registered tax return preparer under the defunct IRS Registered Tax Return Preparer Program. Taxpayers should look for these types of credentialing when selecting a tax return preparer. In recent years, the annual PTIN fee has been suspended due to Court challenges regarding the IRS’ attempt to regulate tax practice.  The IRS’ stated goal when instituting the PTIN program was to improve the integrity and quality of the tax preparation industry.   Some tax professionals challenged this attempt in Court.  Nevertheless, PTIN credential could be a good metric for the public to use when selecting a tax return preparer.  The bottom line is this— when the professional does not have a current PTIN Card; It is possibly a bright red alert to the taxpayer that they could be taking unnecessary risk by hiring an unqualified tax return preparer.  Taxpayers are responsible and liable for the accuracy of their tax returns regardless of who prepares or files the return for them.
    3. Experience in tax return preparation is critical factor when selecting a tax return preparer. Tax law is constantly changing from year to year, and it is very important that the tax return professional maintains competencies in tax law on an annual basis.  The more experience that the tax return preparer has with the type of return involved the better.  For example, if you have foreign accounts, you should think long and hard before hiring any return preparer who has never worked with taxpayers with foreign accounts or offshore assets.  Over the years, our law firm has seen many taxpayers who have been greatly harmed by tax return preparers who failed to properly counsel and advise them with regards to proper tax accounting for offshore assets and accounts.
    4. So to summarize: taxpayers should look for relevant tax law and accounting education, IRS Tax Professional PTIN certificate and tax experience relevant to tax issues related to their particular situation when selecting a tax return preparer.
  • It is very important to make a wise selection choosing which tax return preparer to hire because taxpayers can be subject to civil penalties and even criminal exposure for inaccuracies and materially false statements and tax positions taken on their tax returns and in their claims for refunds.

Interviewer:  Mayra Torres, Public Relations Associate

  • Bright Red Alert! Before hiring anyone to do your tax return, look at the tax return professional’s educational background… like where did they go to school and where did they learn tax and accounting; look at whether they have a current IRS Tax Professional PTIN certification, and look at whether they have the right type of tax experience to prepare your tax return!
  • If any of these three things are missing; it’s a bright red alert folks! Attorney, thanks for answering my question so clearly concerning what characteristics people should look for when selecting a tax return preparer.
  • Did I get the bright red alerts right, Attorney?

Question 3:

Attorney, it sounds like taxpayers can get in very serious trouble on their taxes if they hire an unqualified, incompetent, or dishonest tax return preparer.

Is there any where a taxpayer can turn for help when they suspect that they have been harmed by their tax return preparer?

Attorney Answers Question 3:

  • The Internal Revenue Service has been given the authority by Congress to maintain the public’s confidence in the federal tax system. Under that authority the IRS maintains advisory committees who establish practices, procedures and policies of the oversight offices designed to enforce regulations governing those authorized to practice before the IRS.  The IRS is required under these regulations to maintain a list of individuals and companies who have been disbarred from practice before the IRS; list practitioners with monetary sanctions, and a list of practitioners who have otherwise been sanctioned by the IRS.
  • In addition to the IRS oversight that I have mentioned; professionals such as attorneys and certified public accountants are accountable to their respective professional licensing authorities in their states. These various professional licensing boards have specific complaint procedures where injured taxpayers can file an official complaint.
  • Finally, taxpayers harmed by tax return preparers can also turn to the courts for redress by filing a lawsuit for professional liability or other claim.
  • I should caution here that every tax position taking on a particular tax return may not rise to the level incompetence or malfeasance on the part of the tax return preparer. Judgment is an inherent part of being a tax professional.  That intangible characteristic of confidence and trust in your tax professional cannot be overstated.

Interviewer:  Mayra Torres, Public Relations Associate

Question 4:

What about the people that have an approved family-sponsorship petition outside of the United States?

Attorney Answers Question 4:

  • The Internal Revenue Code imposes an entire laundry list of civil penalties and criminal penalties on Tax Return Preparers who are incompetent or engage in disreputable conduct. The names and descriptions of these various penalties can be very informative as what goals the IRS is attempting to achieve in terms of protecting the public, protecting the public’s confidence in the tax system, and maintaining the overall integrity of the U.S. federal tax system.  So that I don’t overly complicate this for our none-tax professional listeners, I am going to leave out any references to the specific Internal Revenue Code Section or Treasury Regulation where these penalties are codified.  Most of our listeners probably don’t really care to know the actual tax code section and treasury regulation reference numbers for these penalties.
  • This is a list of some of the types of penalties that the IRS can impose on Tax Return Preparers. Taxpayers should just thing about the item on the list and look beyond what is right in front of them to what the IRS is trying to accomplish by imposing these penalties on incompetent preparers or those engaged in disreputable conduct:
    1. Civil Penalties imposed on tax return preparers for failure to meet due diligence requirements for determining eligibility for certain tax benefits, such as, child tax credit, head of household, and earned income credit. Often times, taxpayers take these tax positions in error or with bad advice from tax preparers.
    2. Penalties imposed on tax return preparers for failure to sign the return and penalties for failing to supply identifying numbers such as, PTIN etc. Again, often, returns prepared by paid tax preparers appear to be self-prepared.
    3. Various penalties imposed against tax preparers for giving false or misleading information to the Department of the Treasury or any of its officers, employees, or agents.
    4. Various penalties imposed against tax preparers for aiding, advising or abetting others in violating federal tax law by suggesting or aiding in an illegal plan to evade the proper application and administration of U.S. tax laws or payment of U.S. taxes.
  • Items three and four can result in civil negligence and civil accuracy related penalties; and willful or reckless violation of U.S. Tax laws could lead to criminal referrals and prosecution of the tax return preparer and the taxpayer.
  1. Penalties imposed on tax return preparer for failure to give the taxpayer a copy of their tax return.
  2. Penalties imposed on the tax return preparer for failure to maintain a copy of the prepared tax return.
  3. Penalties imposed on the tax return preparer for failure to maintain a record of who prepared the return.
  • Items five through seven is designed to create a contemporary record and to provide a chain of responsibility. Tax return preparer operations are subject to IRS examination and investigation.
  • These are only a few of the penalties that the IRS could impose on incompetent tax return preparers and those engaged in disreputable conduct.
  • Taxpayers must be careful when tax return preparers over promise, make claims of abilities to obtain certain refund amounts or tax results, or seek to negotiate taxpayer refund checks. Sometimes dishonest preparers claim that the taxpayer has companies, farms, and factories that the taxpayer themselves never knew they had.  Remember you are responsible for the numbers and data on your tax return and the IRS will look for you first to timely pay the correct amount of taxes.  Your tax return preparer may or may not ever be held accountable.  So, a word to the wise:  be careful when you select your tax return preparer.
  • All these penalty areas that I have mentioned in this podcast should help taxpayers to exercise wisdom and discretion when selecting a tax return preparer. Look for professionals with character and experience even though it might cost you more to have your taxes done.  It may cost more in the long run if you choose an incompetent tax preparer, or one engaged in disreputable acts.

Interviewer:  Mayra Torres, Public Relations Associate

  • Attorney, thanks for such a thorough response to my questions about characteristics, qualifications, and other things that people should consider when selecting a tax return preparer. Character and experience always matter!
  • That’s all the questions I have for now with respect to being wise and prudent when selecting a tax return preparer. It sounds like it’s very dangerous to select the wrong person or firm to prepare your tax return.

Attorney Comment:

  • Well, those were all excellent questions, Mayra. And I am glad we were able to discuss the importance of exercising wisdom and being prudent when selecting a tax return preparer.

Mayra Torres’s Concluding Remarks:

  • Attorneys thank you for this comprehensive and informative presentation on selecting a tax return preparer.
  • Our listeners who want to hear more podcast like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever they listen to their podcast. You can follow our blogs by going to our law firm’s website at cjacksonlaw.com.  Everybody take care for now!  Come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., which is located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.
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 Attorney’s Concluding Remarks:

THIS IS THE END OF “LEGAL THOUGHTS” FOR NOW

  • Thanks for giving us the opportunity to inform you about the why people filing taxes should be careful when selecting a professional tax return preparer.
  • If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C. Stay tune!  Watch for a new Legal Thoughts podcast in about two weeks and check our law firm’s website at www. cjacksonlaw.com to follow our blogs.  We are here in Dallas, Texas and want to inform, educate, and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.